Global markets fall as Middle East tensions rise

Israeli tanks are seen in Kibbutz Biri in southern Israel on October 14, 2023 following a massive incursion by Hamas militants from the Gaza Strip. REUTERS/Violeta Santos Moura Obtain licensing rights

Washington, Oct. 15 (Reuters) – The Israel-Hamas war has focused attention on rising geopolitical risks in financial markets as investors wait to see if the conflict is likely to further boost oil prices in other countries. to the global economy.

Israel said on Sunday it would continue to allow Gazans to leave the south as its troops prepared for a ground offensive in the Hamas-controlled Gaza Strip in retaliation for unprecedented attacks by the Palestinian militant group.

Oil prices rose nearly 6% on Friday as investors weighed the possibility of a wider Middle East conflict. The first indicator of a reaction to the weekend’s developments could come when oil trade opens in Asia later on Sunday.

“It looks like we’re headed for a massive ground invasion of Gaza and massive loss of life,” said Ben Cahill, senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS). . “Whenever you have this level of inconsistency, you have a market reaction.”

Market reaction has been relatively muted over the past week, although Israel’s shekel currency took a big hit.

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“I have no clue whether the markets will do relatively well,” said Erik Nielsen, group chief economic adviser at UniCredit. “It almost depends on whether this latest conflict is localized or whether it expands into a wider Middle East war.”

The S&P 500 (.SPX) fell 0.5% on Friday. Safe-haven assets saw gold gain more than 3% on Friday and the US dollar hit a one-week high.

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The widening conflict could further accelerate inflation and, by extension, interest rates around the world, said Bernard Baumohl, chief global economist at The Economic Outlook Group in Princeton, New Jersey.

However, while inflation and rates may rise in other countries in this worst-case scenario, the U.S. may be an exception as foreign investors invest capital in what they consider a safe haven during global conflict, Baumohl noted.

“Interest rates may come down,” he said. “Expect the dollar to strengthen.”

In Europe, economists said the hurdle for another interest rate hike by the European Central Bank was high.

The war between the Islamist group Hamas and Israel is one of the most significant geopolitical risks to oil markets since Russia’s invasion of Ukraine last year.

“If the Ukraine war has taught us anything, it’s that we shouldn’t underestimate the effect of geopolitics,” Nomura Europe economist George Moran said on the bank’s podcast earlier in the week.

Other energy markets could be affected, as seen in recent developments such as Chevron ( CVX.N ) suspending natural gas exports through a major offshore pipeline between Israel and Egypt.

Rising oil prices are unlikely to have a significant impact on U.S. gas prices or consumer spending, analysts noted.

Reporting by Matt Tracy in Washington and Tara Ranasinghe in London; Editing by Megan Davies, Muralikumar Anantharaman and Emilia Sithole-Madaris

Our Standards: Thomson Reuters Trust Principles.

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